Transfer of land and its development rights under GST

TRANSFER OF LAND AND ITS DEVELOPMENT RIGHTS UNDER GST

A piece of land, carry various rights with it. An owner of a land has right to possess, right to easement, right to sale, right to rent, right to develop, right to sub-let, right to occupy and many. Right to develop a land if called "Developmental Rights", in which owner of a land authorises a person to develop a structure of land.

Developmental Right is simply a document granting permission to a person to develop a structure on land. A "Developmental Right" can be easily sold, transferred or exchanged.

Now let's consider an example, Mr. A is owner of a piece of land and Mr. B is a developer. Mr. B approaches Mr. A with a Joint Development Project details and Mr. A has provided his consent to develop on land a Joint -Development Project. After completion of project Mr. B has sold some flats or shops to outsiders and Mr. A become a consenting party in this case. Mr. A will transfer the undivided share in land in favour of outsiders' co-operative housing society. In this case Mr. A's permission will be granted in the form of "Transfer of Development Rights".

Regulation 34 of Development Control Regulations of Greater Bombay, 1991 states that under certain circumstances, the development potential of plot /land may be separated from the land itself and can be made available to the owner of the land in the form of "Transferrable Developmental Rights".

Let's consider another example, Mr. X has a plot of land and some slam dwellers have encroached his land. Now government through its scheme of slum development, approached Mr. P for development of his plot for slum dwellers. Mr. P in exchange get "Transferrable Development Rights" from government. Mr. P can use this "Transferrable Development Rights" on any land subject to fulfilment of some terms and conditions.

LET'S CONSIDER WHETHER TRANSFER OF DEVELOPMENT RIGHTS ARE TAXABLE UNDER GST OR NOT;

Section 7 of Central Goods and Service Tax Act, 2017 levy tax of "Supply" of Goods or Services or both.

"Sec-7, notwithstanding anything contained in subsection (1), -(a) activities or transactions specified in Schedule III; -----shall be treated neither as supply of goods nor a supply of services."

Schedule III, covers sale of land, now whether Transfer of Development Rights in land is taxable, lets us see some court decisions;

Sale of Land and land are not defined under CGST Act, 2017.

CIT Vs Motors and General Stores (P.) Ltd (1967) 66 ITR692 and in case of 20th Century Finance Corporation Ltd. Vs. State of Maharashtra (2000)6 SC 12; held that the word "Sale" denotes transfer of title, which is irrevocable and permanent. Hence "Sale of Land", denotes "Transfer of Title in land".

Let's, see definition of land in other laws;

Section 3(a) of Land Acquisition Act, 1894: defines "Land" as it includes benefits to arise out of land and things attached to earth or permanently fastened to anything attached to the Earth.

 Section 3(a) of the Bombay Land Revenue Code: - "Land" includes benefits to arise out of land and things attached to the Earth or permanently fastened to anything attached to the Earth and also shares in or charges on the revenue or rent of villages or other defined portions of territory.

Safiya Bee Vs. Mohd. Vajahath Hussain (2011)2SCC94, Apex Court:  and in various other cases it was held that "land" includes benefits arise out of land.

Now it is clear that "Land", includes benefits to arise out of land. Nagen Hazarika Vs. Manorama Sharma AIR 2007 Gau 62; Guwahati High Court held that expression "Title" is a broad expression in law, which cannot always be understood as akin to ownership. It conveys different forms of a right to a property, which can include right to possess such property.

It means that the "land" not only includes full title in the land but also rights, which gives benefits associated with it.

Girnar Traders Vs. State of Maharashtra (2011)3SCC: held that Land Development Right is a right to carry out development or to develop the land or building or both. Thus, it is a benefit arising out of land and hence included in the definition of Land.

NOW LET'S UP DISCUSS "SALE OF LAND", ON SUPPLY OF GOODS OR SERVICES ASPECTS UNDER GST;

AS GOODS;

In Joint Development Agreements, the land owners have not only given land development right but also right to sell the units constructed on their land. The possession of land has been parted out by the land owner to the developer, through Power of Attorney, executed in favor of developer.

Now in this case "Right to develop" a land is a benefit arising out of land and hence same is squarely covered within definition of "Land". Since the same right is given irrevocable and permanently, it is covered within the definition of "Sale of land. The same is covered in Entry 5 of Schedule III to Central Goods and Service Tax Act, 2017 and hence the same neither be considered as sale of goods or supply of services.

Thus, the sale of developments rights is not taxable under GST.

Same as above Transfer of Development Rights, shall also not be considered as "Goods", because, it involves transfer of interest in immovable property.

Section 2(52) of CGST Act, 2017 -includes transfer of interest in movable properties.

AS SERVICES;

Section 2(102) of CGST Act, 2017, Services includes anything other than goods. However, an activity, being other than goods, cannot be considered as service, if such activity dose not possess any element of service as understood in commercial parlance. Thus, transfer of development rights cannot be considered as Service.

From above definitions and judgments of the apex courts, we can presume that "Sale of land", connotes' transfer (irrevocable and permanently) of title in land including rights in the form of benefits arising from it. The same is covered under entry number 5 of Schedule III to CGST Act, 2017 and hence same shall neither be regarded as supply of goods or supply of services or both and hence GST cannot be levied on Development Rights.

The Government on 25/01/2017 through Notification No. 4/2018-CGST(Rate) provides clarification that Development Rights are indirectly held to be taxable and opened a window for litigation.

LET'S CONSIDER IF ONE HAS DECIDED TO PAY TAX ON DEVELOPMENT RIGHTS, WILL BE ABLE TO CLAIM INPUT TAX CREDIT.

The answer of above is: yes, an assessee paying GST on Development Rights can claim credit under CGST Act, 2017.

But Section 17(5)(d) of CGST Act, 2017 provides that "goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.

Through this entry, the government can restrict input tax credit on Development Rights. Since it blocks good or services or both received by a person in construction of immovable property. However, Development Rights are procured in relation to construction. Therefore, one can claim the credit of taxes paid on transfer of development rights.

DIFFERENCE BETWEEN FSI & TDR

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